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Thursday October 21, 2004 - 20:12:01 GMT
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Forex: Better Than Expected Claims And Philly Fed Fail To Bolster Dollar

DailyFX Forex Fundamentals 10-21-04

By Kathy Lien, Chief Strategist of www.dailyfx.com

· Better Than Expected Claims And Philly Fed Fail To Bolster Dollar
· Pound Rallies As UK Consumers Continue To Spend
· Verbal Intervention In The Yen Begins

EURUSD

The mighty euro continues to move higher, shaking off what seems to be better than expected US economic data. Yesterday we said that, “according to our proprietary Speculative Sentiment Index (SSI), bulls have been taking profits on their long positions while the overall market (speculators) is becoming increasingly short. If the rally continues, there could very well be a capitulation point and short squeeze that will push prices drastically higher.” Today, our SSI confirms that the extension in the rally was based upon short covering as open interest falls 16% over the past 24 hours while short positioning decreased 20%. More upside could be in store for the euro with the market still extremely short. Government officials from the Eurozone have begun to downplay the euro’s rally, with Austria’s Grasser saying that the ‘Euro rate won’t hurt economic growth,’ Netherland’s Zalm saying that the “Euro’s rise is not an issue for him,” and Spain Solbes indicating that although the Euro’s rise must be monitored, it could be beneficial for inflation. Comments from government officials are not always in line with the sentiment of corporations, so we still caution against corporate hedging. However the lack of concern by EU officials at this point are not without cause. The rise in the euro helps to offset some of the inflationary effects of oil prices. Meanwhile the euro completely shook off a -0.6% drop in French consumer spending.

USDCHF

A stronger than expected headline number for the Philly Fed Survey and initial jobless claims report only provided momentary relief for the US dollar. The Philly Fed index increased from 13.4 to 28.5, completely erasing the prior month’s dip. The latest manufacturing sector report indicates that the weakness in the NY region appears to be unique only to that region. Orders, shipments and prices paid all remained strong in Philadelphia. However, other components of the report were less encouraging. Namely the manufacturing employment index fell from 21.5 to 14.1, the lowest level since April, while the average workweek dropped to the weakest point since November 2003. The measure of expectations for the next six months also dropped from 44.9 to 27.6, indicating falling optimism. Nevertheless, the strength in the Philly Fed survey suggests that the national ISM survey should remain firm. Meanwhile, jobless claims fell from a revised 354k to 329k. Although the report is encouraging, it could be distorted given the Columbus Day holiday. Leading indicators fell –0.1% in September, right in line with expectations. This is not a huge cause for concern since the index remains at a relatively strong level. In a speech on Oil and the Economy in Georgia today, Fed President Bernanke said that higher oil prices could hurt growth in the long-run and that the Fed does take the impact of oil into account when discussing monetary policy.

GBPUSD

To our surprise and the surprise of even the most optimistic economists surveyed by Bloomberg, who forecasted a 0.6% increase in retail sales, the UK consumer remains vigilant despite the slowdown in the housing market, higher oil prices and higher interest rates. Retail sales increased 1.0% m/m in September and 6.9% y/y. Discounts as well as strong demand helped to fuel gains, yet the inclusion of a key August bank holiday weekend into the dataset also helped to boost sales. The British pound has broken out of some key resistance levels after consolidating for slightly over a month. However gains were limited ahead of tomorrow’s third quarter GDP release. Household spending has remained strong, suggesting that GDP could now surprise on the upside.

USDJPY

The verbal intervention that we warned about in USDJPY has begun as the pair tumbles another 0.8% over the past 24 hours. Japanese Finance Minister Tanigaki said that the government is carefully monitoring moves in the FX markets while Vice Finance Minister Hosokawa was more blatant and said that currency moves should reflect fundamentals. The Ministry of Finance has a history of surprising the markets, therefore a follow up with physical intervention is not necessarily a certainty, especially since the economy continues to improve gradually. Meanwhile the trade surplus increased from Y574.8B to Y1237.6B, which was slightly smaller than expected. Oil prices boosted the value of imports while exports increased a healthy 12.7% y/y.

 

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